Next Steps on Medicare Reform Now

While there is broad agreement that we can no longer afford a delay in addressing the quality and cost challenges facing Medicare and our health system, differences on views about the solution run deep. Supporters of the Affordable Care Act (ACA) emphasize further steps in reforming traditional Medicare payments and in how healthcare is regulated, while critics of the legislation emphasize more choice, flexibility and responsibility for patients. My own belief is that major steps in both provider and consumer reforms are needed to work together to support better care at a lower cost — real healthcare reform.

Whatever form it takes, Congress might not be able to enact comprehensive legislation on Medicare’s cost and quality issues now. Yet Congress can make meaningful progress in reforming Medicare’s physician payment system to encourage innovation by providers and better choices by consumers. The way Medicare pays physicians and health professionals is the linchpin for real reform because of the importance of physician decisions in overall healthcare quality and cost.

Medicare’s current fee-for-service system has been criticized for encouraging overuse of services, but its biggest impact comes from placing physicians at financial risk when they try to undertake many innovative ideas to improve health and save money. Because fee-for-service doesn’t pay for it, physicians are penalized for taking important steps like implementing innovative outreach or Web-based programs to help their beneficiaries receive covered, but often unused, preventive services; hiring nurse practitioners and paying pharmacists to help patients with chronic diseases modify lifestyle and use medication effectively; redesigning their practices to better coordinate care for the growing number of beneficiaries whose problems require multiple physicians to work together; or even just spending more time with patients who most need time.

Right now, not only does Medicare fail to pay adequately, if at all, for these critical services for patients; when physicians do succeed in implementing these changes at their own expense, they see their Medicare payments fall because they bill for fewer admissions, procedures and other avoided costs as a result. Today, physicians who take these steps to help their patients are placing themselves at real financial risk.

Five years ago, as Centers for Medicare and Medicaid Services (CMS) administrator, I testified, “If we are able to design a payment system that aligns reimbursement with quality and efficiency, we can better encourage physicians to provide the type of care that is best suited for our beneficiaries.” Since then, the cost of public insurance, both Medicare and Medicaid, continues to skyrocket. As I testified earlier this month to the House Energy and Commerce Committee, such increases in our entitlement budget would not only “require substantial additional tax revenues; if the past is any guide, it also means that other key federal priorities will be squeezed down.”

Fortunately, since 2006, alternatives to arbitrary restrictions on physician payments have become more clear, and are even being implemented by health professionals, health plans and states around the country — often in spite of the Medicare payment system not coming along — to improve quality and lower cost. Federal pilot programs and legislative reforms over the past decade have also helped lay the foundation for a more sustainable physician payment system. These reforms include payments to physicians for using health IT to improve care, as well as for reporting on and achieving better quality. The ACA, specifically, provides opportunities to strengthen accountable care organizations and expand “bundled” payments to reward health professionals for working together. Many of these reforms I advocated for or piloted as CMS administrator, and most have notable bipartisan support.

However, none of these reforms has yet addressed the core problems with Medicare’s fee-for-service system. With a near-30 percent scheduled reduction in Medicare physician payment rates, there is a legislative opportunity to change that. While some physicians might want to continue to be reimbursed on the basis of volume and intensity, there is enough evidence on these reforms that physicians should at least have the option of payments that better reflect their ability to improve health and lower costs. This would include payments at least in part on the basis of whole episodes, as in Medicare’s Acute Care Episode (ACE) demonstration, which provides hospitals and physicians with a prospectively fixed amount for a bundle of orthopedic and cardiac services. It should also include broader per-beneficiary payments to beneficiaries’ primary care providers. These payments would partially replace traditional fee-for-service payments, with savings resulting from that shift plus the ability of physicians to choose services more efficiently based on the needs of patients. Physicians would receive more flexibility and (if their actions can reduce other healthcare costs) potentially more resources. At the same time, they would start to be accountable for showing improvements in quality of care and avoiding unnecessary costs.

These reforms will require some improved capabilities at CMS, which should also be supported in the upcoming legislation. Medicare must provide physicians with better and more timely data on their beneficiaries’ overall care and on any measured gaps in quality. Many health plans are doing this already; Medicare should aim to use consistent methods.

If we can start with steps on Medicare physician payment, other reforms that also support more flexibility in getting the best results for patients without unnecessary costs, including further payment reforms as well as reforms in benefits and how beneficiaries choose care, will be that much easier to achieve.

Moreover, by enacting real physician payment reform — and enabling CMS with the new capabilities it will need to execute these reforms — we are supporting what may be the most powerful force for achieving real healthcare reform: physician leadership. Practicing physicians — and the professional associations and health professionals who work with them — know best where there are opportunities to improve care and to avoid unnecessary costs. Physicians can and should lead on healthcare reform, and Medicare needs to provide them a better opportunity to do so than having to fight for short-term “fixes.”

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